Many loan programs come with the option for home buyers to buy down an interest rate. What this means is the borrower can pay a certain amount in closing costs to have their interest rate reduced. The upfront cost is usually measured in points, where 1 point is 1% of the overall loan amount, and adjustments can cost as little as an eighth of a point. How much 1 point will lower your rate depends upon a number of factors, but generally will bring your rate down by one to three quarters of a percent. Similarly, you can usually increase your interest rate to lower your closing costs, with a similar points to percent ratio.

So when you are given options from a qualified mortgage officer, it does certainly make sense to see how much you can buy your rate down, or how much you can impact your closing costs by taking a higher rate, and calculating the value you are getting. Your mortgage officer should be able to tell you where your break even is for either option; the break even is either the point where your savings on interest over the life of the loan outweighs the upfront cost, or where the upfront savings are outweighed by the additional interest costs (in the event you are taking a higher rate for lower closing costs).

So if you have a $250,000 loan and it will cost you 1 point to save .75%, the breakeven point is where the interest savings from paying .75% less in interest every month outweighs the initial $2500 (1 point) investment. With that information, you can make a decision if you will be in the house long enough to realize the savings, and if it is worth it to part with your money up front.

So while I cannot say definitively if it will make sense for you to buy down your rate or not when buying a new house, I can tell you it is an important conversation to have with a mortgage loan officer, as buying down points has been known to save my clients tens of thousands of dollars over the length of a mortgage.

If you have any questions about buying down the rate on a mortgage or about your mortgage needs, specifically, please contact me. If you have anything to add about determining if it makes sense to buy down an interest rate, please leave a comment.